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Core Technical

Syllabus

1 June 2016

Subject CT3 Probability and Mathematical Statistics Core Technical

Aim

The aim of the Probability and Mathematical Statistics subject is to provide a grounding in the aspects

of statistics and in particular statistical modelling that are of relevance to actuarial work.

Subjects CT4 Models and CT6 Statistical Methods: use the statistical concepts and models

covered in this subject. These are then developed further in other subjects in particular Subject ST1

Health and Care Specialist Technical, Subject ST7 General Insurance Reserving and Capital

Modelling Specialist Technical and Subject ST8 General Insurance Pricing Specialist Technical.

Objectives

(i) Summarise the main features of a data set (exploratory data analysis).

graphically using a line plot, a box plot, a bar chart, histogram, stem and leaf plot, or

other appropriate elementary device.

2. Describe the level/location of a set of data using the mean, median, mode, as

appropriate.

3. Describe the spread/variability of a set of data using the standard deviation, range,

interquartile range, as appropriate.

4. Explain what is meant by symmetry and skewness for the distribution of a set of data.

1. Explain what is meant by a set function, a sample space for an experiment, and an

event.

calculate probabilities of events in simple situations.

4. Derive the addition rule for the probability of the union of two events, and use the rule

to calculate probabilities.

5. Define the conditional probability of one event given the occurrence of another event,

and calculate such probabilities.

6. Derive Bayes Theorem for events, and use the result to calculate probabilities.

Subject CT3 Probability and Mathematical Statistics Core Technical

7. Define independence for two events, and calculate probabilities in situations involving

independence.

(iii) Explain the concepts of random variable, probability distribution, distribution function,

expected value, variance and higher moments, and calculate expected values and probabilities

associated with the distributions of random variables.

1. Explain what is meant by a discrete random variable, define the distribution function

and the probability function of such a variable, and use these functions to calculate

probabilities.

2. Explain what is meant by a continuous random variable, define the distribution function

and the probability density function of such a variable, and use these functions to

calculate probabilities.

3. Define the expected value of a function of a random variable, the mean, the variance,

the standard deviation, the coefficient of skewness and the moments of a random

variable, and calculate such quantities.

with distributions.

5. Derive the distribution of a function of a random variable from the distribution of the

random variable.

generating function and cumulants, derive them in simple cases, and use them to evaluate

moments.

random variables.

3. Define the cumulant generating function and the cumulants, and determine them for

random variables.

4. Use generating functions to determine the moments and cumulants of random variables,

by expansion as a series or by differentiation, as appropriate.

generating function, a cumulant generating function and cumulants are used, and the

reasons why they are used.

Subject CT3 Probability and Mathematical Statistics Core Technical

(v) Define basic discrete and continuous distributions, be able to apply them and simulate them in

simple cases.

1. Define and be familiar with the discrete distributions: geometric, binomial, negative

binomial, hypergeometric, Poisson and uniform on a finite set.

exponential, gamma, chi-square, t, F, beta and uniform on an interval.

3. Define a Poisson process and note the connection between Poisson processes and the

Poisson distribution, and that a Poisson process may be equivalently characterised as:

(1) the distribution of waiting times between events, (2) the distribution of process

increments and (3) the behaviour of the process over an infinitesimal time interval.

4. Generate basic discrete and continuous random variables using simulation methods.

(vi) Explain the concepts of independence, jointly distributed random variables and conditional

distributions, and use generating functions to establish the distribution of linear combinations

of independent random variables.

and conditional distributions.

conditional distribution.

4. Define the expected value of a function of two jointly distributed random variables, the

covariance and correlation coefficient between two variables, and calculate such

quantities.

5. Define the probability function/density function of the sum of two independent random

variables as the convolution of two functions.

independent random variables.

1. State the central limit theorem for a sequence of independent, identically distributed

random variables.

distributions, and to calculate probabilities.

Subject CT3 Probability and Mathematical Statistics Core Technical

discrete distribution.

(viii) Explain the concepts of random sampling, statistical inference and sampling distribution, and

state and use basic sampling distributions.

4. Determine the mean and variance of a sample mean and the mean of a sample variance

in terms of the population mean, variance and sample size.

5. State and use the basic sampling distributions for the sample mean and the sample

variance for random samples from a normal distribution.

6. State and use the distribution of the t-statistic for random samples from a normal

distribution.

7. State and use the F distribution for the ratio of two sample variances from independent

samples taken from normal distributions.

(ix) Describe the main methods of estimation and the main properties of estimators, and apply

them.

and apply it.

parameters and apply it.

3. Define the terms: efficiency, bias, consistency and mean squared error.

5. Define the mean square error of an estimator, and use it to compare estimators.

6. Describe the asymptotic distribution of maximum likelihood estimators and use it.

distribution based on a random sample.

distribution.

Subject CT3 Probability and Mathematical Statistics Core Technical

3. Calculate confidence intervals for the mean and the variance of a normal distribution.

4. Calculate confidence intervals for a binomial probability and a Poisson mean, including

the use of the normal approximation in both cases.

distribution, and the binomial and Poisson distributions using the normal

approximation.

6. Calculate confidence intervals for a difference between two means from paired data.

1. Explain what is meant by the terms null and alternative hypotheses, simple and

composite hypotheses, type I and type II errors, test statistic, likelihood ratio, critical

region, level of significance, probability-value and power of a test.

2. Apply basic tests for the one-sample and two-sample situations involving the normal,

binomial and Poisson distributions, and apply basic tests for paired data.

3. Use a 2 test to test the hypothesis that a random sample is from a particular

distribution, including cases where parameters are unknown.

4. Explain what is meant by a contingency (or two-way) table, and use a 2 test to test the

independence of two classification criteria.

(xii) Investigate linear relationships between variables using correlation analysis and regression

analysis.

2. Define and calculate the correlation coefficient for bivariate data, explain its

interpretation and perform statistical inference as appropriate.

4. State the usual simple regression model (with a single explanatory variable).

5. Derive and calculate the least squares estimates of the slope and intercept parameters in

a simple linear regression model.

7. Calculate R2 (coefficient of determination) and describe its use to measure the goodness

of fit of a linear regression model.

with confidence limits.

Subject CT3 Probability and Mathematical Statistics Core Technical

9. Use residuals to check the suitability and validity of a linear regression model.

10. State the usual multiple linear regression model (with several explanatory variables).

2. State the usual model for a one-way analysis of variance and explain what is meant by

the term treatment effects.

(xiv) Explain the concepts of conditional expectation and compound distribution, and apply them.

1. Define the conditional expectation of one random variable given the value of another

random variable, and calculate such a quantity.

2. Show how the mean and variance of a random variable can be obtained from expected

values of conditional expected values, and apply this.

3. Derive the moment generating function of the sum of a random number of independent,

identically distributed random variables (a compound distribution), and use the result to

calculate the mean and variance of such a distribution.

END OF SYLLABUS

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